Professional Documents
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Because of over diversification, the merger and acquisition craze, and the use of
extraordinary debt, many firms have had to restructure in late 1980s and early 1990s.
Most institutional investors would prefer to choose which industries they invest in
themselves, rather than add another layer of conglomerate managers to make that
choice for them.
Companies also attempt to diversify their product line to enhance the value of the firm
through economies of scope, economies of scale, and market power, among other
goals.
By diversifying the firm’s product lines, top executives reduce the risk of losing their
own jobs.
Majority of unrelated acquisitions are divested in a short time after that purchase.
Synergy is created when competency and resources can be shared across business.
It leads to economies to reduce cost.
Related acquisitions are often undertaken to spread the geographical diversification of
a firm.
Achieving synergies to gain the benefit of related diversification acquisition is
challenging. It requires careful and thorough planning and coordination as well as
effective integration of two firms acquiring unrelated business does not necessitate
this coordination and integration.
Acquiring unrelated business
The primary reason for poor performance and changes such as the inability of the
firms to achieve the synergies either in the sharing of resources and capabilities or in
financial resources allocations.
This problem begins with conflicts and differences in styles and strategies between
the two firms.
Acquisitions are highly complex strategies to design and implement and they are only
further complicated by acquiring firms with product lines that differ from the firms
current core businesses.
The most valuable diversifying acquisitions from learning point of view are those that
are more highly related to the firms core business.
It is more difficult to learn from unrelated businesses that are acquired, because the
knowledge basis have much less over lap, the knowledge learned over the long term
relates to developing new technological capabilities, a more complex form of learn.
It creates product diversity and international diversity.
Manager can develop competencies in managing internal diversity.
Without appropriate transfer pricing policies, conflict could ensure.